The west is being "outspent, outmanoeuvred and out-strategised" by violent Islamic extremism, Tony Blair has warned.

The former prime minister said there had been a failure to challenge the narrative that Islam was oppressed by the west which was fuelling extremism around the world.

He said too many people accepted the extremists' analysis that military actions taken by the west after the 9/11 attacks were directed at countries because they were Muslim and that it supported Israel because Israelis were Jews while Palestinians were Muslims.

"We should wake up to the absurdity of our surprise at the prevalence of this extremism," he said.

"Look at the funds it receives. Examine the education systems that succour it. And then measure, over the years, the paucity of our counter-attack in the name of peaceful coexistence. We have been outspent, outmanoeuvred and out-strategised."

Speaking last night in New York to the Washington Institute for Near East Policy, Blair said it was impossible to defeat extremism "without defeating the narrative that nurtures it".

Moderate Muslims who believed in coexistence and tolerance were, he said, being undermined by the unwillingness of the west to take on the extremists' arguments.

"We think if we sympathise with the narrative – that essentially this extremism has arisen as a result, partly, of our actions – we meet it halfway, we help the modernisers to be more persuasive," he said.

"We don't. We indulge it and we weaken them. Worse, a reaction springs up amongst our people that we are pandering to this narrative and they start to resent Muslims as a whole."